How to Pick a Junior Miner
“This is a great time to pick up some cheap junior mining shares!” declares Byron King. “Juniors are severely undervalued. Many of them just plain got SMASHED in the market meltdown of 2008 and early 2009. Companies with literally billions of dollars of ore under claim were selling for an utter pittance.
“Now with the price of gold on the rise, we’re coming into a time when major gold producers are starting to get up off the mat and make acquisitions. So by purchasing a range of shares in these junior miners, you’ll be giving yourself the opportunity for windfall profits.
“I came up with a set of concepts that I always look for in my junior recommendations. In grading a junior miner, I have five main concepts. They include:
· Management assessment: track record, interview, insider buying/selling records and word of mouth – I try to determine whether management is an asset or liability (only assets pass)
· Share structure: A good share structure is one that hasn’t seen any chance for distribution yet, and where insiders and key people still have a meaningful enough stake in the company
· Capital structure: Does the company meet my solvency tests (past and future)?
· Scope: risk versus reward: Is there enough upside relative to the risk category of the deal – for risky juniors, I like a 10-to-1 ratio… for blue chips, a 3-to-1 ratio… etc.
Valuation: absolute and relative. This is not really objective. Typically, I will want to understand the reason for the market’s current valuation – relative and absolute – and if the reason for an expected favorable change in valuation is plausible. I’ll be looking for areas in which the junior is undervalued – in which you can pick up shares for a hefty discount.